US Dollar: Friend or Foe?

JC Parets
March 8, 2021

We are in the midst of a bull-run and the events over the last ten days or so have sprung up some doubts over the current move with regards to the repercussions of the rise in bond yield and the US dollar.

We included the US Dollar(DXY) chart in the Three Charts for the Week ahead post since DXY moved past its resistance in the week gone by. Let's take a look at how this had panned out in the past and what are the signals that we can identify in the present.

The chart below tracks DXY and Nifty 50 over the past 20 years. Note that we are looking at the subsequent move in Nifty 50, following the bottoming out of DXY. The dashed lines mark the reversals in DXY, which is what we're tracking here. Of the seven instances where we've seen the bottoming out of DXY, Nifty 50 has continued to rally on four such occasions.

On three occasions the negative correlation plays out as can be seen in the years 2000, 2008 & 2015.

Click on chart to enlarge view.

Next up, we're taking a look at Base Metals against DXY. No points for identifying the trend here though. The base metals are negatively correlated to DXY as can be seen in the four occasions where the dollar bottomed out. The DXY and base metals index lines are basically a mirror image of each other.

A spike in the US dollar most definitely is not good news for the commodities.

In order to get a wholesome view on the same, we looked at commodity-currencies as well to see if there's any signal there. These are currencies that perform well when the commodities market is doing well and vice versa.

The Australian Dollar has been rallying since March 2020 along with the commodities. The currency pair is now reaching a crucial level of 0.82, which has acted as a multi-year resistance. A breakout beyond this level will add the narrative of the commodity supercycle as this is a commodity heavy economy.

Similarly, the Canadian Dollar is another indicator of the health of the commodity market. The breakout above 0.78 bodes well for a good move going forward, with the next level of resistance placed at 0.83.

Let's look at a couple of Indian currency pairs.

USD/INR bounced from the crucial level of 72.20, and is now above 72.90. With the kind of swift bounce-back we saw from levels of 72.20, we may see higher levels in this pair going forward. The next resistance to track is placed at 74.50.

JPY/INR has turned away from its overhead resistance and is moving towards its support of 0.67. We're tracking this level to see if the pair breaches this support and moves lower. After a long-drawn narrow consolidation, a breakout generally turns into an explosive move, regardless of the direction. The next support comes in at 0.64.

So while the stock market hasn't always corrected with a rise in the US dollar, the negative correlation between commodities and DXY has played out consistently. Will it continue going forward? Most likely. But we're going to continue tracking these charts to see if there's a confirmation of any particular trend.

Thanks for reading and please let us know if you have any questions.

Allstarcharts Team

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